“With revenue-based availability, we’re incentivized to optimize revenue”

Interview with Juan Gutierrez, CEO of Service

Madrid / 16 December 2020

Why Revenue Based Availability makes sense.

An interview with Juan Gutierrez, CEO of the Service Business Unit at Siemens Gamesa, on how the company is helping its customers navigate the end of subsidies.

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Q: The marketplace environment for customers is evolving rapidly, with support mechanisms beginning to fall away in some markets for both new unit and legacy installations. What impact will this have on electricity providers and the companies that support them?

A: Up to now, the focus of the wind industry has been lowering the cost of electricity. We set ourselves on a journey to compete with conventional production methodologies such as Oil & Gas and coal, and, to a large degree, we’ve succeeded. As an industry, we currently dedicate hundreds of millions of euro to chasing these sought-after low-cost levels for a produced kWh – and there’s still value in doing this, of course.

But as wind becomes cost competitive, the subsidy schemes that were created to foster the green transformation of our electricity systems and to create jobs are naturally winding down, especially in mature markets. The discussion starts to shift in another direction: how can our customers extract the most value or revenue out of every produced KW hour?

If they continue to exclusively pursue yield-based availability (YBA) in a spot or mature market environment, their assets will operate, their turbines will spin, but their profits will diminish – it’s like running an empty taxi around New York City all the time

Juan Gutierrez,
Service CEO

Q: And what happens in these markets?
A: In these mature markets, there’s an inverse relationship between the price of electricity and the amount of electricity on the market. It’s classic supply and demand: the prices will drop when there’s a lot of it available and increase when there's not. But if they continue to exclusively focus on electricity production KPIs, power providers in these markets may actually begin to harm their own business cases by generating electricity at the lowest price.
Juan Gutierrez, CEO of the Service Business Unit at Siemens Gamesa
That’s because if they continue to exclusively pursue yield-based availability (YBA) in a spot or mature market environment, their assets will operate, their turbines will spin, but their profits will diminish. That’s not optimal, as they will ultimately negatively impact their entire business case by depleting the fatigue life of their assets without earning any money – like running an empty taxi around New York City all the time.

The US is a good example, actually: you will begin to see onshore projects there that will basically become insolvent because their running costs will start equaling out or in some cases even dipping below their projected revenues.
Q: So, what’s the alternative?
A: As a leading OEM (original equipment manufacturer) service provider, we looked for a way to bridge the two worlds of lowest cost of electricity with highest revenue for our customers. Our solution is to offer revenue-based availability (RBA), a new availability warranty product developed to best fit projects that are fully or partially exposed to varying market energy prices. In essence, an RBA warrants an availability performance based on revenue.
With RBA, we’re incentivized to optimize revenue by keeping turbines operational when the revenue potential is high. To achieve this, we consider both wind speed and electricity price when planning our service activities. As the correlation between them tends to be negative, high generation periods do not necessarily appear at the same time as high revenue periods.

Of course, we need to be smarter and think differently about how we employ and deploy service technicians, but this won’t be fundamentally difficult for us. Instead of using just a weather forecast to dispatch our service technicians, we now use a spot market price forecast and a weather forecast.
Q: Will customers go for it?

A: In a fixed tariff situation, the only variable that you’re optimizing for is production. But when subsidies are being reduced or removed, wind farm owners are forced to rethink their business models in order to deal with a variable that’s not so predictable.

We’ve seen that they will most likely go for a mix of a fixed private power purchase agreement (PPA) and a certain degree of open market pricing.  Some customers are looking for a 50/50 split, others 75/25 in favor of the fixed PPA. The reason for the split is that customers are interested in harvesting the benefits from both.

Revenue-based availability, a new availability warranty product
With a fixed PPA, obviously you get some stability and assurance in your business case, which is good and sometimes even required for financing. On the other hand, if you go and tap into the open market pricing you have the opportunity to really benefit from the higher price fluctuations.

Some of the largest offshore tenders come out with an expectation of zero subsidy bids. If our customers are interested in making these bids, then they need the assurance that they get from us through an RBA. A common effort is required to meet the needs of the market, and at Siemens Gamesa we stand ready to help with a viable solution.

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